It’s difficult not to conclude from PwC’s latest report on non-executive directors, released every year in January, that the system of corporate governance in which the board and its various committees play an oversight role is broken.
Perhaps it was foolish to assume an oversight system based on committees of ‘outsiders’ would be effective in directing, or even controlling, the individual flair of executives tasked with managing what are often large and complex organisations.
Inevitably perhaps, much of this oversight responsibility has fallen to the remuneration committee.
This was never intended but given that pay is a major determinant of behaviour it should have been expected that shareholders would look to members of the remuneration committee to influence the behaviour of executives.
The PwC report refers to the increased expectation from stakeholders that remuneration committees (Remcos) pay greater attention to the wider context in which pay considerations are made.
These expectations have been intensified by the Covid-19 environment which, says PwC, has had profound implications for workforces in many industries.
“Remcos are being asked to predict and strategise in a world in which organisations are experiencing change at a faster rate than ever before,” says PwC, adding that “new skills” are required in this new world.
The challenge facing Remcos is made even tougher by what PwC describes as a “decreasing pool of South African talent”.
The audit and financial services firm does not explain, despite the steady increase in third-level educational establishments over the past two decades, on what basis it believes the local talent pool is shrinking.
But the smaller talent pool combined with a faster moving world replete with new skills requirements means companies need a strong people strategy.
And despite a plethora of board committees, there’s generally little sign of any sort of people strategy.
This appears to be where today’s board structure is failing.
“While significant hours and resources are expended to create successful business strategies, often far less attention is directed to the people strategy and considering how to best engage and inspire the individuals who will drive and implement these strategies, and who are core to the organisation’s success,” says PwC.
But should oversight of this apparently crucial people strategy be added to the Remco’s already stretched role, or that of the human resources committee?
“Or is this the domain of another body or committee, and is there consensus that the remuneration strategy and human resources (HR) strategy in its basic form is no longer sufficient?”
Shareholders already weary of the costly burden of corporate governance compliance might be inclined to shudder at the prospect of yet another board committee, with its attendant board committee fees.
PwC reckons the old remuneration committee days are over.
“Remcos can no longer operate in a silo in which remuneration is their only weapon in tackling the issues that appear on their agendas.”
It seems, according to PwC, that there’s a growing awareness that retention, motivation, and issues of fairness and responsibility cannot be solved with remuneration alone.
Furthermore, says PwC, “stakeholders are no longer willing to accept money being thrown at the problem”.
This article first appeared on Moneyweb and was republished with permission.
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